Behind the Scenes of Cryptocurrency Exchanges: Secrets, Strategies, and More

The following article is based on insights from the Blockchain Connect Conference in San Francisco. Included in this exchange panel are exchange CEO’s Chris Lee (OKEX), Jesse Powell (Kraken), Mike Kayamori (Quoine), Chief Strategy Officer Kailong Cai (Huobi), and Head of International Markets Ted Lin (Binance Exchange).

“We’re gonna be a much more prosperous society because we don’t require such a huge drag on our society… because the blockchain is now that trusted third party.”- Tim Draper, American venture capital investor.

Cryptocurrency Trading Demographics

The US, Japan, and China are major cryptocurrency markets. The average trader is male in their 20s and 30s, with females and other extreme age groups entering the market.

OKEX: “30% of all Koreans are trading crypto.”

Huobi: 70% of customers come from China, a lot from Japan, but not much from US. About 50% are 30-50, while the average Chinese investor is 20-30. “The male to female customers 4 months ago was 4:1. Now it’s 3.3:1. So female involvement is growing very fast”.

Kraken: Kraken exchange users are mostly male, with a recent influx in both really young (18 years old with little money) and those around 70 years old. The average age in mid-30s more and tech-savvy with a bit of money to invest. “Lately we’ve seen both of the extremes, teens and people 70+.”

Binance: “We are 270th globally on Alexa, and 70th in the USA. The US is our biggest market, average age 25-35, mostly men.” The ones that are still not in crypto are the midlife crises ones, ages 50-60s, “but even grandmas are talking about crypto”.

Quoine: Early 20s coming en masse.“When I started it…. they were looking for the next excitement”. Crypto is “bigger than FX” and other assets–Japanese investors are interested in leverage trading.

Importance of Cryptocurrency Exchange Security

Individuals need to make sure the exchange they are using makes security a priority, as exchanges are always a target. Moreover, users need to stop posting their cryptocurrency investments on social media.

Kraken: “Security is something we think about constantly… it was at the core of the exchange… it’s what inspired us to make an exchange” said Powell. “It’s a marathon, not a race… saw a lot of prominent members getting their cellphones ported away, people getting kidnapped”. Powell continues to warn traders on their personal safety, saying “if you talk about Bitcoin on social media, you should think twice about it”.

Binance: “When you grow too fast too quickly, you take shortcuts…There’s a tradeoff between customer convenience and security”. Lin makes it clear that some exchanges aren’t taking warning security measures in actual practice. Even with a regulated market in Japan, things still happen, which is why it is “up to each individual to make sure the service provider you are using puts security front and foremost”.

Impact of Whales In the Cryptocurrency Market

The exchange leaders tend to agree that there are whales, ranging from medium to heavy influence over the cryptocurrency market. However, there are no market makers with control total control over the market just yet. Investors need to beware of coins with low liquidity as they can be easily manipulated.

Kraken: “There are definitely whales that are market-making…. but I wouldn’t say anyone has massive influence over the price”.

Binance: “I would say whales exist, but not necessarily with evil intentions”. Some whales “out to play, some out to arbitrage”. Lin continues to say that some whales are “out to play, some out to arbitrage”, with less liquid markets like Ripple (which is 60% owned) having “whales that are market making, doing arbitrage”. Ultimately, Lin believes manipulation isn’t too widespread.

Huobi: Whales effect “70% of Bitcoin positions”.

How do Exchange Choose the Coins They List?

OKEX: The company looks at technology and how large the market is, and if there is “a ceiling” for this market. They also want to know if it is a utility token, and the risks, security, and the characteristics of the technology behind it. Lee says it takes a couple of weeks to a month to list a new coin.

Huobi: Huobi has a credit system called “smart chain” based on five criterion. This includes the strategy, management team, technology, its market size, and its potential. However, “one thing we don’t share is how we weight these items… we don’t want the bad guys to go public”.

Binance: People ask me “what are you gonna list next. It’s become a craze for people to jump on the next big thing”. Lin says there are only a few different ways to really understand if you picked the right project. “For us, we do a very proprietary methodology. Is the team good, do they have good track records, do they have a product…. And do they actually use blockchain technology for real?”. He continues to say they like modest teams that don’t seek extravagant amounts of money. “We pass less than 3% of all applicants in our reviews… 97% of those are rejected” states, Lin.

Trends

Bitcoin still is the preferred coin to trade, but altcoins are gaining traction. There’s also a slew of entrepreneurs attempting to appeal to the masses by launching ICOs.

Huobi: Before, we saw people trading a lot more. Now we see people holding it.

Quoine: Bitcoin is still the most popular coin. Its popularity is due in part because it’s the largest token in respects to volume as well as the Japanese government calling crypto legal tender.

Binance: Japan is more around Bitcoin, with the altcoin market being very small. This has to due with government regulations, as the government has to approve coins.

The Future of Cryptocurrency Trading

While the cryptocurrency market still looks like the wild west, market manipulation is expected to decrease. Countries should be looking to regulation to help control this manipulation.

Quoine: As the market matures, market manipulation will go down. Overtime, when there are more institutional investors and retail investors, the market will mature and exchanges will have to be transparent about who’s making markets, and who’s buying what.

Cryptocurrency Trading Psychology

People need to do better background research on coins instead of just investing based on its value or what the news says.

Kraken: Powell states “it’s scary when you hear some of these strategies”. He believes the news manipulates trading behaviors and thinks it is often dangerous to invest in coins just because they have a less than one cent value.

Binance: New users are often looking to coins with large fluctuations as they find them more exciting and potentially lucrative.

Final Thoughts

As the cryptocurrency world evolves in terms of user adoption and government regulation, cryptocurrency exchanges will be forced to adapt. Many exchanges are making large strategic bets on where they see the industry headed. Running a cryptocurrency exchange requires having nearly sage-level foresight mixed with the grit of being able to run a startup in an extremely fast paced and competitive environment.

Cryptocurrency exchange developments are going to be a very interesting topic to follow in 2018, so stay tuned for more!